Borrowers chase best looking rates
Sovereign Financial Services head Paul Bravo reports 80 per cent of new borrowing is now into floating rate products and just 20 per cent into fixed, compared with a 50/50 split for his company's new business only a year ago.
Sunday, August 15th 1999, 12:00AM
by Paul McBeth
Borrowers are chasing cheaper interest rates and greater flexibility rather than the certainty of 'locking in', causing a swing away from fixed rate mortgages in favour of floating.Paul Bravo, Managing Director of Sovereign Financial Services Limited, reports a massive 80 per cent of new borrowing is now into floating rate products and just 20 per cent into fixed. That compares with roughly a 50/50 split for his company's new business a year ago.
"Fixed rate lending always used to be about taking the uncertainty out of your mortgage," Bravo says. "It wasn't necessarily about taking the cheapest rate or getting the best product."
However, borrowers are now more inclined to chase the best looking rates whether they're fixed or floating. What's changed in recent months is that the gap between them has widened - in fact, the last time floating rates were so attractive relative to fixed was in late 1994 and then only briefly.
Bravo says that "as we've now moved into a different rate environment, borrowers are coming back in droves to the floating rates". However, he believes that the new business profile for Sovereign's competitors is slightly different.
"Our mortgage reinsurers have recently noticed a modest swing away from the dominance of fixed rates. Other lenders are more likely to be split 50/50, which contrasts with our own business profile. Our own experience of the swing to floating rates seems to be a consequence of the superior level of knowledge and maturity found among the mortgage broking industry."
Although a sister company of ASB Bank, Sovereign is a non-bank mortgage lender which sells its products through brokers. Bravo says his company is going through enormous growth at the moment as the mortgage broking industry becomes more accepted.
"When we were established (in November 1996), we talked about getting a five per cent market share over the next five years, a position we are well on our way to achieving," he says.
"What's happening is that the mortgage broking industry is becoming more firmly entrenched here. Whereas you used to have to dig out the yellow pages, today there are ads in the newspaper and on TV, and a number of franchise operations are becoming widely accepted.
"The industry is increasingly attracting very good calibre people with backgrounds in banking and other financial services.
"We're also seeing more stories about the closure of bank branches. New Zealand is now at the forefront of reduction in branches per head of population, and the public is probably feeling a little bit disenfranchised.
"However, banks are now looking to claim a bigger share of the business that mortgage brokers originate and so their products and rates are becoming more competitive. That's a situation that is certain to benefit all borrowers."